Slowdown predicted despite growth

Growth rebounded in the June quarter but economists still believe the economy is slowing.

Statistics New Zealand said gross domestic product rose 1.1 per cent in the quarter, well above economists' pick of 0.7 per cent.

But the annual average growth rate fell to 3.1 per cent from 3.8 per cent in March and 4.4 per cent in December.

Growth was concentrated in the services sectors, which make up about two-thirds of economic activity.

Service industries grew 1 per cent in the quarter, as did agriculture, and construction was up 2.3 per cent but manufacturing shrank 0.3 per cent and forestry, fishing and mining fell 1.1 per cent.

The expenditure measure of GDP grew 1.3 per cent for the quarter but most of that (1.1 per cent) was explained by a run-up in inventories.

"That might mean that retailers, manufacturers and wholesale distributors have decided the economy is going to go gangbusters and have pulled in a lot of stock in anticipation of that," said Bank of New Zealand economist Stephen Toplis.

"But it might instead mean people have made a mistake and stockpiled more than they can get rid of, in which case you should revise down your expectations of future growth. We think it is more likely to be the latter."

Westpac economist Nick Tuffley thinks unwinding the run-up of stocks could make for weaker growth figures later in the year.

"In addition, consumer spending, while still resilient, is moderating, residential construction fell in the June quarter and is unlikely to rebound and net exports are a drag on growth."

Non-residential construction (including prisons) jumped 18 per cent, more than offsetting a 2.9 per cent fall in residential work.

Consumer spending rose 0.7 per cent, but that is down from an average increase of 1.4 per cent in the three previous quarters. Spending was particularly strong on vehicles, furniture and appliances.

But much of the quarter's 2.1 per cent increase in internal demand was met by imports, which rose 4.2 per cent in volume terms while exports increased only 1 per cent.

ANZ National Bank chief economist John McDermott said the quarterly uptick did not change his view that the economy was decelerating.

"The full impact of a high dollar ... and higher petrol prices will not be felt until mid-2006."

He said such a slowdown would be of only modest comfort to the Reserve Bank. Growth was still strong enough to put pressure on inflation.

ANZ expects the Reserve Bank to raise interest rates next month. So do the BNZ and ASB Bank.

Toplis said the Reserve Bank's forecasts in the September monetary policy statement incorporated another rate hike.

"They didn't move then because of uncertainty about oil prices and the fiscal outlook and because the market wasn't pricing it in, which makes it that much harder to sell the story.

"Now, however, the market is fully pricing in a rate hike and even contemplating the possibility of two rate increases."

In addition the housing market was stronger than expected and the current account deficit worsening.